The Sound Bite:

Medicare is Inefficient and Costly as compared to the private insurance industry. 

Fact or Fiction?

Fiction. In general, Medicare’s efficiency and cost controls compare favorably with the private insurance industry. In fact, throughout the program’s history, per-person spending on Medicare has remained equal to or lower than the cost of private health insurance premiums. 

Data released by the Centers for Medicare & Medicaid Services (CMS) shows that, on average, Medicare spending rose 4.3 percent each year between 1997 and 2009, compared to the private insurance premium growth rate of 6.5 percent per year for the same period.

Whether Medicare will continue to control costs over the coming decades is uncertain. The Medicare trustees have said that under current reimbursement rules Medicare’s share of gross domestic product (GDP) will rise from today’s 3.7 percent to roughly 6.0 percent in 2040, and to 6.7 percent in 2085. If the Sustainable Growth Rate (SGR) restraint is overridden, costs would rise to 6.5 percent in 2040 and 7.8 percent in 2085. Finally, if the SGR restraint is overridden and the Affordable Care Act (ACA) cost-saving measures erode, costs would climb to 7.0 percent of GDP in 2040 to 10.3 percent in 2085.  This steep increase over the coming decades has been primarily attributed to baby boomers swelling the ranks of beneficiaries.

Parts of the Affordable Care Act (ACA), however, attempt to control future costs. According to the Congressional Budget Office (CBO), per capita spending on Medicare will grow 1 percent faster than the rate of inflation from 2012 to 2022, a slower incline than was previously predicted, thanks in part to the ACA’s reducing high payments to Medicare health maintenance organizations (HMOs). 

Ultimately, the greatest contributor to Medicare spending growth is that baby boomers are heading toward retirement. Over the next 25 years, Medicare enrollment is expected to increase from 47.5 million today to 80 million in 2030, making it easily the greatest threat to Medicare efficiency and controlling cost.

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